Wall Street Buys NATO Microwave Towers in Quest for Speed

Supporting cables run from a 800-foot former military communication transmission tower as it stands in Houtem. Infrastructure that the U.S. Defense Department depended on in Europe is being used to fight a different war: the battle among high-frequency trading firms to buy and sell securities faster than rivals. Photographer: Jasper Juinen/Bloomberg

July 16 (Bloomberg) -- An 800-foot microwave tower in a
Belgian cow pasture transmitted messages for the U.S. armed
forces in 1983 when suicide bombers killed hundreds of military
personnel at Marine barracks in Beirut, Lebanon. Now it’s being
used by high-frequency traders.

Jump Trading LLC, a Chicago-based company founded by former
pit traders, bought the tower last year through a U.K. affiliate
called Toren Navo Aansluiting Ltd., according to documents filed
in the U.K. and Belgium. The English translation of the name:
“NATO connection tower.”

Trade orders that were once executed using shouts and hand
signals now travel across continents with a swiftness that can
approach the speed of light. Fiber-optic cable used to be the
choice of electronic trading firms such as Jump that are locked
in a contest to be the fastest. Now they’re adopting microwave
technology, which can convey data in nearly half the time, to
squeeze profit from fleeting and often tiny price discrepancies
in assets traded around the world.

“It really comes down to defending your position,” said
Peter Nabicht, a senior adviser to the Modern Markets Initiative
trade group and the former chief technology officer at Chicago-based high-frequency trader Allston Trading LLC. “If one person
goes to microwave, they have a distinct advantage, so other
firms have to go to microwave, too, to maintain their relative
speeds. It’s like bikers who are in a fight to be at the front
of the pack.”

‘Flash Boys’

Jump’s purchase and recent refurbishing of the tower in
Houtem, Belgium, comes as high-frequency traders face added
scrutiny engendered by Michael Lewis’s book, “Flash Boys,” in
which he accused the industry of rigging markets. Jump was one
of the firms to receive subpoenas from New York Attorney General
Eric Schneiderman, who’s looking into whether electronic traders
profit from non-public information, a person with knowledge of
the matter told Bloomberg News in April. The U.S. Federal Bureau
of Investigation is also investigating the industry, Bloomberg
News reported in March, citing a person with knowledge of the
probe.

Jump didn’t respond to a message sent to its “media
inquiries” e-mail address. The firm declined to meet with
Bloomberg News when a reporter visited their offices without an
appointment. Subsequent meetings arranged with Tessa Wendling,
the firm’s general counsel, were canceled. She didn’t return
phone calls seeking comment, nor did Jump’s chief operating
officer, Matt Schrecengost.

Cutting Time

Firms in the U.S. started experimenting with microwave
transmissions four or five years ago to shorten the time for
orders and financial information to travel between data centers
outside Chicago and in the New York City suburbs, said Hugh
Cumberland, a manager at Colt Technology Services Group Ltd. in
London whose clients include high-frequency traders.

Microwave use has more recently moved to Europe, where
trading firms are using former military towers to shoot signals
at light speed from bourses in Frankfurt to exchanges in London.
The goal is to profit from price moves in stocks and other
assets that evaporate before human traders can catch up -- in
times measured in millionths or even billionths of a second.

Roads, Rivers

A disadvantage of fiber is that it can be slowed by
obstacles such as roads, rivers and mountains. Another
shortcoming is that light travels more slowly through cable than
it does through the atmosphere. Microwave has the potential to
be faster because data is shot in a straight line through the
air from tower to tower. Speed matters because traders compete
to capture price movements in stocks or other assets on
different markets hundreds of miles apart.

Microwave isn’t perfect. It can’t carry as much data as
fiber because the bandwidth is narrower and transmissions can be
disrupted by poor weather and deflections off the English
Channel, Cumberland said. Most trading firms using microwave
back it up with a cable network, he said.

Custom Connect BV, based in Amersfoort, Netherlands, owns a
microwave network completed in March 2013 that cut to 4.43
milliseconds, or by about 50 percent, the round-trip time it
took data to travel from Frankfurt to London via cable, Jan
Willem Meijer, the company’s chief executive officer, said in an
interview. One-thousand milliseconds make up one second.

First Link

Custom Connect’s network was the first microwave link
connecting the main financial centers in Europe that multiple
trading firms could pay to use, he said. Individual trading
firms had already built their own proprietary systems, Meijer
said.

Karen Bertoli, chief marketing officer for Perseus Telecom,
said her company, in October 2012, was the first to offer
customers a microwave connection between Frankfurt and London.
While Perseus sells access to the network, including the Houtem
NATO tower, it doesn’t own it, she said in an interview today.
She declined to identify the owner.

About 25 companies use Custom Connect’s network, including
trading units at investment banks and high-frequency trading
houses, said Meijer, who declined to name them. The network,
which cost about 5 million euros ($6.8 million) to build, relies
on 13 towers across Europe. Meijer wouldn’t comment on who owns
the towers or their specific locations, saying he was concerned
about competition. Meijer also declined to discuss how much
Custom Connect charges clients.

Frequency Squatting

Traders need multiple towers because signals run the risk
of breaking up beyond 100 kilometers (62 miles). Controlling a
single tower wouldn’t benefit a trader unless the goal was to
force rivals to go around it by using a slower, less direct
route, or hoarding the frequencies that companies rely on to
transmit financial data, said Colt’s Cumberland.

“There are rumors in the industry that people have bought
tower space or have bought frequencies that they don’t use,”
Cumberland said. “We call it ‘frequency squatting’ or ‘tower
squatting.’”

High-frequency trading of stocks peaked at 63 percent of
U.S. trading volume in 2009 before declining to 51 percent last
year, according to consultant Aite Group LLC.

In Europe, high-frequency trading grew to 41 percent of
equity volume in 2013 from 25 percent in 2009, Aite research
shows. The increase comes as Europe is moving to implement “one
of the toughest set of regulations for high-frequency trading in
the world,” Michel Barnier, the European Union’s financial
services chief, said in April.

‘Incredibly Important’

Jump’s tower in Houtem and others across the English
Channel near the White Cliffs of Dover transmitted messages for
the U.S. armed forces during the Cold War and when bombers
attacked the Marine barracks in Beirut in 1983, said Darcy
Calvillo, a former Air Force sergeant.

“At the time, those sites were incredibly important,”
said Calvillo, 51, who spent the early 1980s helping manage the
Air Force’s communication network from a military base outside
London. “The United States is very fortunate geographically,
because we have two oceans to protect us, but our protection
goes much further than those two oceans.”

The U.S. Air Force gave up leasing rights to the Houtem
tower when it decided to move to a fiber communications network
in 2006, according to a spokesman.

Houtem, part of the municipality of Veurne, is about an
hour-and-a-half drive west of Brussels near the English Channel.

‘A Lot’

Veurne Mayor Peter Roose said a sales and marketing
executive from VolkerWessels Telecom Infra Technik GmbH, a unit
of a Dutch conglomerate, contacted him in March 2013. The
Belgium Ministry of Finance had sold the tower, which was the
property of the nation’s Defense Ministry. The buyer hired
VolkerWessels to upgrade it so traders could use the site as one
link in a chain stretching between Frankfurt and London, Roose
said.

“They came to me asking what they had to do here in Veurne
to have the necessary papers to do these works at the tower,”
he said in an interview. “Someone paid a lot of money for it.”

While Roose said he doesn’t know the identity of the buyer,
he said Belgian government officials told him the purchase price
was 5 million euros. Veurne land registry records obtained by
Bloomberg News show Toren Navo Aansluiting owns the tower,
without disclosing a purchase price.

Gjalt Rameijer, a spokesman for VolkerWessels, confirmed
that his company was subcontracted to overhaul and upgrade the
tower, which sports two new gray dishes and a fresh coat of
paint. He declined to name the buyer. Belgium Finance Ministry
spokeswoman Florence Angelici wouldn’t comment on who bought the
tower or the price paid, citing the government’s “professional
secrecy policy.”

Toren Navo

Toren Navo Aansluiting, based in London, was incorporated
in February 2013, according to a filing with the U.K.’s
Companies House. The company’s one listed director is Steven
Hunt. That’s the name of Jump’s chief technology officer, who is
a former vice president of technology at Goldman Sachs Group
Inc. Its only shareholder is ECW Wireless LLC, the Companies
House filing shows. Jump co-founders DiSomma and Gurinas own
stakes in ECW, according to the U.S. Federal Communications
Commission’s ownership database.

Jump’s founders have been just as active across the
Atlantic Ocean. World Class Wireless LLC, which ECW owns and has
the same address and senior managers as Jump, holds more than
130 microwave licenses in the U.S., according to the FCC
website. The firm has transmission locations in Illinois, Ohio,
Pennsylvania, New Jersey, New York, Delaware, Maryland, Indiana
and Washington, D.C., according to the site.

Price Differences

Some of the locations fall between the Chicago suburb of
Aurora, Illinois, where CME Group Inc., the world’s largest
futures marketplace, has a server farm, and northern New Jersey,
where Intercontinental Exchange Inc.’s NYSE, Nasdaq OMX Group
Inc. and a host of other stock venues have data centers.

Sending data back and forth between the U.S. Midwest and
East Coast allows high-frequency traders to profit from price
differences for Standard & Poor’s 500 Index futures in Chicago
and stock prices in New York. Those money-making opportunities
often last only tiny fractions of a second, far faster than a
human unaided by technology can react.

World Class Wireless also has licenses for transmission
locations on Long Island, including the town of Bellport, which
is also home to a landing station for one of the underwater
fiber-optic cables that connect the U.S. to Europe, according to
Level 3 Communications Inc.

In England, World Class Wireless has secured frequency
licenses for at least three locations, according to records kept
by Ofcom, the U.K. communications regulator. The sites include
Basildon, where Intercontinental Exchange has a 315,000-square-foot data center; Slough, home to a 226,000-square-foot facility
owned by Equinix Inc. that accesses more than 20 European
financial markets; and London.

Air Force

Other financial firms in the U.K. have also turned to
former military structures to gain a trading edge. A set of
towers in Swingate near Dover once used by the U.S. Air Force
are now owned by Arqiva Ltd., a company that evolved out of the
British Broadcasting Corp.’s privatization of transmission
facilities in 1997.

While broadcasters and mobile-phone companies make up most
of Arqiva’s customers, companies that build microwave networks
for traders are increasingly using its infrastructure,
Cumberland said.

An Arqiva spokeswoman said that companies have been using
its towers to transmit financial data since September 2011.

Optiver Holding BV, an Amsterdam-based proprietary-trading
firm, has signed up for a frequency license near Dover,
according to Ofcom. Optiver paid $14 million in 2012 to settle
allegations that the firm used a trading program it called the
“Hammer” to manipulate oil markets. Optiver didn’t admit or
deny wrongdoing in settling the U.S. Commodity Futures Trading
Commission’s complaint.

Speed Advantage

“The biggest advantage of microwave-trading technology is
indeed speed,” said Hans Pieterse, an Optiver director who
confirmed the company will use the frequency it obtained for
trading. He declined to comment on the CFTC settlement.

Calvillo, the U.S. Air Force veteran, now teaches high
school in Southern California after a 12-year career at MCI Inc.
He said he was based about 18 miles west of central London at
the U.K. Royal Air Force station in Uxbridge, England, from 1981
to 1984. From Uxbridge, his 2119th Communications Squadron
operated part of the grid that essentially made up the U.S.
military’s telephone network.

Over time, national-security priorities changed and
technology evolved. The U.S. Air Force disbanded the 2119th
squadron and the U.K. closed Uxbridge as an active base in 2010.
Calvillo said he’s not surprised that the financial industry has
found a new use for the towers he once relied on to transmit
secret military communications across the globe.

“It makes sense, because the next generation of war is
probably going to be financial related,” Calvillo said.
“Everyone is trying to buy everyone else’s stuff.”